It all started when the decision was made to continue recognising swaps as something “different” from futures contracts and options that have been under federal oversight for generations. If this had not occurred, many (most) swaps might be folded into the existing regime with a great saving of words and timber. But we must live with the congressional output which, lately, has not been easy to do. Swaps that track changes in the value or level of an asset would be “futures contracts” that, just like futures, have a limited life and seldom result in transfer of the underlying thing. Swaps that pay out when certain contingencies occur (like credit default swaps) would be “event options.” Full stop.

Instead, swaps remain separate from regulated futures and options, requiring the creation of new entities like “swap execution facilities,” “swap data repositories,” “swap dealer,” and other special venues for which futures systems already exist. OK, at least it may create much-needed jobs (a prominent topic these days). But the transformation does not end there.

We discover, first, that many options previously regulated by the Commodity Futures Trading Commission will now be morphed into swaps. This is the result of the legislation itself that defines the term so broadly that options that were heretofore required by the CFTC to be traded on exchanges or, if not, limited to narrow exceptions for commercial use, now drift into the parallel universe of the swap regimen, including generous exemptions from the exchange/clearing requirement. Remarkably, the new law expands the swaps universe rather than reigning it in.

Now, I understand that the expanded swap definition under consideration in a CFTC rulemaking may actually include instruments calling for either mandatory or optional delivery of the underlying asset. Historically, the CFTC treated such transactions as futures contracts, drawing a line when cash settlement did not occur. And the existing regulatory system at the time made it a felony to offer futures contracts except on a supervised market. The border between permissible and criminal has always been a bit vague, but the current rulemaking would seem to allow futures look-alikes to be offered without compliance with futures requirements.

The benefits of swap labeling are many. True, there will still be new requirements. But there will be advantages as well. For example, the Dodd-Frank Act contains a clause allowing commercial firms to employ swaps as risk hedges without using any exchange, without submitting the trade for clearing, and with very flexible standards for whether and how to collateralize the deals. Many foreign exchange swaps have been lifted entirely out of the reform scheme by fiat of the US Treasury (recently downgraded for other reasons). And customised swaps are likely to remain OTC because no exchange or clearinghouse will want to take responsibility for these mutants.

So, has it come to name calling? If my attorneys are clever enough to advise that I should offer an instrument indistinguishable from a crude oil, corn, copper, or cotton futures contract but call it a swap, can I now navigate the swaps regulations rather than the futures regime?

Is the Dodd-Frank Act becoming a great Black Hole that can suck the old laws and regulations into its oblivion, so that swaps consume the space? Might the day come when mainstream futures exchanges are cited for not conforming with the swap regime (e.g., where is your license to operate as a swap execution facility and why aren’t your traders registered as swap dealers)?

So what has any of this to do with Lewis Carroll, author of Alice’s Adventures in Wonderland? Why, the Cheshire Cat, of course. This mythical animal could appear and disappear at will, often leaving behind only his broad grin. Could that be the grin of a swap staring back at us?